It might be the UK City of Culture, but Derry is a bold choice for this year’s Turner Prize exhibition, the award’s first venture outside England. As Penelope Curtis, the director of Tate Britain and the chairwoman of the Turner panel, says, everyone has put a huge amount of work into the project. And it shows. It’s impressive that, effectively starting from scratch, they’ve come up with a tight, well-organised exhibition in a sensitively tailored venue, a former barracks on the huge Ebrington site.

Ebrington, a 10-hectare complex on the east bank of the River Foyle that was a closed military installation between 1841 and 2003, is now at the heart of Derry’s cultural and civic regeneration. “From parade ground to common ground,” as Shona McCarthy, head of the city’s Culture Company, puts it. The Peace Bridge, opened in 2011, links it to the cityside opposite.

So much for the logistics, but what about the prize shortlist and the exhibition itself? Two Irish judges are on the panel: Annie Fletcher, an Eindhoven-based curator, and Declan Long, of the National College of Art and Design. The others are Susanne Gaensheimer, director of Frankfurt Modern Art Museum, and Ralph Rugoff, director of the Hayward Gallery.

Curtis says that hers was a fairly passive role in the process, although she has expressed her liking for David Shrigley’s Hayward Gallery exhibition, the show that got him on to the shortlist. The flavour of that list, with a strong emphasis on engagement, participation, cultural politics and economic issues, seems to reflect Fletcher’s curatorial priorities.

This applies especially to Tino Seghal, the London-born, Berlin-based artist who has built a significant international reputation by devising projects that consist almost entirely of “live encounters between people”. His training in choroegraphy comes into play as much as his study of political economics. Small teams of meticulously trained “interpreters” engage with visitors.

In Derry he is staging a piece originally made in 2003, This Is Exchange. Enter his gallery space and an interpreter is likely to offer you £2 in exchange for your views on the market economy.

Seghal’s economic thinking is grounded in Hans Christoph Binswanger’s ideas on sustainable development, which propose an alternative to the general model of relentless growth and consumption. As the conversations proceed, apparently abstract questions lead to more local, personal concerns, addressing the kind of community values we would like.

Bottom lineHistorically, Seghal’s approach derives in part from Guy Debord’s situationist movement, formed in the late 1950s, and coincides with ideas more recently formulated by Nicolas Bourriaud in his influential book Relational Aesthetics. The bottom line is that art should be an agent for social and political change.

It’s notable that the human interactions set up by Seghal are usually valued by their participants – and not just because of the £2 bounty on offer. He won the main prize at this year’s Venice Biennale and looks to be a clear favourite to win the Turner.

It’s no insult to describe Shrigley as the joker in the pack. That’s exactly what he is: a kind of Dadaist prankster, best known for his deadpan graphic and text pieces. Sculpture has become more central to his work, but mostly in the form of taxidermy with a punchline or cartoons translated into three or, as in the case of Life Model in the Turner exhibition. Here, his mock-heroic take on Michelangelo’s David is a mis-shapen nude who occasionally pees into a strategically placed galvanised bucket.

Shrigley’s gallery is kitted out as a life room, with a model at its centre, and visitors are invited to join in. Layers of their drawings already line the walls. No matter what your take on the oddly proportioned model, though, it’s never going to look right, and that’s presumably part of the egalitarian point: there’s no right way or wrong way, no good drawing or bad drawing.

Shrigley and Seghal make up the participatory high point, but, depending on your timing, you may be offered a cup of tea in Laure Prouvost’s elaborate installation, Wantee. The weakest part of the two terrific pieces that make up her display is that you really have to understand their rationale to appreciate them in any depth.

They stem from an invitation she received to respond to the startling, rough-hewn Merzbarn construction created by the German artist Kurt Schwitters during his final years, which he spent in England’s Lake District.

Prouvost invents a parallel narrative involving her own notional grandparents, he an avant-garde artist, she a loyal if frustrated supporter, both friends of Schwitters. Her installation is the cabin they lived in, packed with unwanted art and teapots, caked with mud from the tunnel to Africa he started excavating as a final conceptual flourish, and into which he eventually disappeared. His story, and the complementary Grandma’s Dream – perhaps even better – are elaborated in two frenetic, funny, though also sad, touching videos that make up her show’s twin centrepieces.

Her quicksilver use of a huge range of imagery in these videos, breathlessly delivered with a repititious staccato rhythm, is initially irritating and a little challenging but ultimately rewarding. She dislodges us from our customary complacency as spectators and puts our eyes and brains to work gathering scraps and details as they rush by, prompting us to put them all together. Her narration is perfectly pitched. She’s made something both entertaining and with many layers of allusive meaning. She’d be a thoroughly plausible winner.

The weakest link in the exhibition, alas, is Lynette Yiadom-Boakye, a Londoner of Ghanaian descent. She paints “imaginary portraits”, and they’re shown sparingly illuminated in a darkened room, something that works against them, because the reverential presentation seems out of kilter with their loose, casual, even sketchy manner. They are okay but nothing special. The figures hint at narrative complications that remain deliberately unexplained. In fact they are expressly ambiguous, to the point of androgony. Yiadom-Boakye is also a poet and a writer, and one can’t help but wonder whether these relatively slight paintings might be enriched by being seen in relation to such textual material.

Gravity lackingIdeally the prize should mark a moment of definitive arrival in the development of an artist. One stipulation is that they be under 50, “born, living or working in Britain”. What this year’s Turner lacks is the gravity of a major talent, someone who makes you feel, gosh, there’s just no way around this person: you have to deal with them. It is more take it or leave it.

In the ambition of his enterprise, Seghal comes closest, but there is a sense that even he hasn’t quite clinched the deal. In her gleeful, orderly disorder, Prouvost has a creative energy and inventiveness, and a grasp of detail, that hint at brilliance, but perhaps the accolade would be slightly premature. But then that has often been the case with the Turner. It’s not so much a case of gambling on who’s going to win as gambling on a winner: will they go on to other, perhaps greater things?

Turner Prize 2013is at Ebrington, Derry, until January 5th; the winner will be announced in the city on December 2nd, at a ceremony broadcast on Channel 4

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